economic systems
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27 Terms
economic system
a particular set of institutions or coordinating mechanism to solve the economic problem of scarcity
name 3 types of economic systems
market system, command system and laissez-fair capitalism
what economic systems composed of
role players, objects, and processes
role players
economic subjects and decision makers
objects
products, goods and services
processes
production, consumption and investment savings
how does each economic system differ
based on who owns FOP and the method used to motivate, coordinate and direct economic activity
what do economic systems determine
what goods are produced
how they are produced
who gets them (for whom)
how to accomodate change
how to promote technological progress
laissez-fair capitalism
theory to keep government from intervening in the economy to protect private property and establish legal environments which contracts are enforced
who holds ownership of the FOP in laissez-fair capitalism
individual households and individual firms
what methods are used to coordinate, motivate and direct economic activity in laissez-fair capitalism
households and firms control majority of the decision making and the role of the government is limited
command system
a central government dictates permissible levels of production and prices
who holds ownership of the FOP/property in command system
government (majority of the times)
what methods are used to coordinate, motivate and direct economic activity in command system
the central planning board determines production goal for each enterprise and specifies no. of resources
examples of countries that were subject to a command system
USSR, China, Cuba, North Korea, Eastern Europe
what were the main problems of a command system
coordination and incentive problem
how is coordination a problem in command system
central planners had to coordinate millions of individual’s decisions
if one industry failed than this will lead to a ripple effect
as economy expanded coordination problem worsened
plus lack of success indicators
how is an incentive a problem in command system
central planners determined the output mix
this led to shortages and surpluses
how were managers rewarded in a command system
based on production goals (incentive)
market system
economic decisions and the pricing of goods and services are guided by the interactions of a country’s individual citizens and businesses
who owned the FOP/property in a market system
individual households, individual firms or the government
centralised
decisions made by the government
decentralised
decisions made by individual households and individual firms
characteristics of market system
private property
freedom of enterprise and choice
the ‘invisible hand’
explain the ‘invisible hand’
Firms and resource suppliers, seeking to further their own self-interest and operating within the framework of a highly competitive market system, will simultaneously, as though guided by an ‘invisible hand’, promote the public of social interest
what are the three advantages of market system
efficiency
incentives
freedom
emerging markets
a country that is transitioning from low income to a modern industrial economy with higher standard of living, e.g. BRICS